COVID-19: B2B Volume Risk
Part 2 - Managing your electricity supply contract
Published by Michael Layton | 19th April 2020
During the current pandemic the impacts on businesses may well be immeasurable. However, the electricity consumption usage and patterns have also dramatically changed; causing havoc and uncertainty throughout the UK energy industry. This piece is intended to help end users and Third Party Intermediaries understand what action they need to take within their supplier contracts.
This guidance is intended to support large end users and Third Party Intermediaries. Flexible Purchasing Contracts can be a complex world and re-forecasting consumption generally also leads to a revision of the required trade-able blocks of energy for your business for the period. Here is some insight on re-forecasting to support you.
Consumption monitoring is key, and the data is readily available, not just in the current climate but before and after this pandemic. Throughout the contract period it is recommended you monitor your forecast versus actual consumption on a monthly basis so you can see any variances. Any large variances may lead into further investigations so that you can understand the reasons behind them and any actions, if required, you may wish to take.
How does Contract Consumption Forecast convert to trade-able clips
On electricity flexible purchasing contracts (prior to the start of the contract period), the consumption forecast your business is expected to use for that upcoming period is broken into trade-able blocks (Baseload – block of consumption covering 24 hours a day for the period and Peakload – a block of consumption covering period 7am – 7pm Monday to Friday) to be traded throughout the contract period in-line with your risk management strategy. Depending upon the flex product the cost of the forecasted consumption above/below the trade-able blocks may be captured within the shape/residual charge (standard flex products) or pass-through (cash-out products).
The diagram below shows an example of an average weekday and weekend usage and the chosen baseload consumption for that period.
Suppliers or TPIs may differ in the way they optimise your Contract Consumption Forecast into trade-able blocks, either to support a preferred risk management strategy or it may be driven by a preferred product structure / optimisation methodology.
How re-forecasts may impact your trade-able blocks
On a flex contract the easiest way to apply a re-forecast is to re-adjust the trade-able blocks, however if you have fully traded these blocks and your consumption forecast has reduced; this could impact the energy price you will pay. This is because these blocks will need to be sold back in to the market and could be at a much lower price than the price they were bought at.
See below example:
If you have an open position (where you haven’t yet transacted to fix the price) these blocks will be removed before any traded blocks are sold back, this again will impact your expected energy rate as you would no longer have these blocks to purchase.
As an example if you have bought half of you tradeable volume at £50/MWh (5p/kWh) and had half open at current market say £30/MWh (3p/kWh) you would have been expecting an energy rate of £40/MWh (4p/kWh). However, if your new forecast meant all of the remaining open volume was removed your energy rate would now be £50/MWh (5p/kWh).
Future contract periods
As both charges rely on historical usage; it is imperative that when looking at the imbalance and shape costs for any future contracted periods they are not detrimentally impacted by this pandemic period. Seek advice from your Supplier/Third Party Intermediate/Energy Expert if you are seeing increases in these charges for future periods. The current pandemic will have caused an impact to the electricity expected consumption usage and costs for several businesses. The previous articles will hopefully have helped manage these during the pandemic but what to look out for after your business’s return to normal.
Future Consumption forecasting
Forecasting your future consumption usage is imperative to assist with budgeting; as well as ensuring you are trading the correct amount on your fixed/flex contracts. When forecasting the usage for future periods the last 12 months’ worth of actual usage is normally used and rolled forward mapping any special days (bank holidays, standard shutdown periods). However, the pandemic will have meant a prolonged period of unusual usage behaviour. It is imperative to work with your supplier/third party intermediate or an energy expert to ensure the forecast excludes these periods and they are replaced with a better view of a standard usage pattern. This may be the same period in 2019 or by adjusting your post pandemic usage.
Future Cost forecasting
Cost forecasts/budgets can come in many forms from a simple x% increase from last year to a bottom up aggregation by site/cost element. Keeping on top of your electricity cost forecast is an important part of your business and can be quite complex. Adding the pandemic period in to the mix makes it even more difficult. By ensuring the consumption forecasting is as accurate as possible, this should naturally lead into the best view of your business’s cost forecast for the future periods. There is a lot of information readily available on electricity costs, but also get assistance from your supplier/third party intermediate if you require assistance.
1. Don’t avoid re-forecasting – work with your supplier, third party intermediary or seek advice from an independent energy expert. Help is on hand!
2. Consider how you best sell back – rather than sell back shape where the pricing is less clear, do look to sell back closed volume in trade-able blocks where possible. E.g. If your business day usage has fallen, consider whether this convert to a peak load block for resale.
3. Utilise the latest information – there is uncertainty about how long the pandemic will last and how we will return to BAU. Therefore how long your usage will vary and the price exposure it leads to, so only re-forecast the “certainty” periods (month ahead, quarter ahead, etc) and consider how much energy you fix until you have greater certainty.
4. Monitor cost forecasts – the pandemic has shown how electricity costs can fluctuate, so it is imperative to have a forecast of your electricity costs for the next few years ahead and that you then ensure you regularly review these.
The main thing to remember if this period of electricity consumption/cost is not the normal for your business, then it is not in your best interests to consider this for future period forecasting or tender analysis.
Michael Layton has worked in the UK Energy Industry since 2000, having worked in various commercial roles for E.ON and Npower and most recently for the TPI Energimine. He has deep industry knowledge and it enables him to be able to explain complex topics clearly and precisely. Michael’s understanding of the workings of B2B flexible purchasing contracts is second to none, as is his understanding of non-commodity costs and related supplier processes. Michael is well positioned to support large end users, TPIs and Suppliers in review their supply contract structures & pricing to ensure volume & price risk are managed effectively and to ensure contracts are structured appropriately. Michael has been a TUME Associate since March 2020.
The Utility Market Experts offer risk mitigation and structuring guidance when dealing with complex energy contracts
The COViD-19 pandemic is rapidly leading to the largest reduction in energy consumption since 2008’s credit crunch; and is starting to move beyond this. Energy contracts are designed to provide the flexibility end users require, but typically the more flexibility the higher the risk. Some suppliers have standard product offerings and some TPIs have preferred structures, but it is important your chosen solution both meets the requirements for you as a business from day 1 and that you know how best to manage situations like the one currently being faced.
Whether you are a supplier, a Third Party Intermediary or an end user; an expert second opinion should always hold value. Whether dealing with the expected (embedded assets installed or efficiency measures implemented) or unexpected (such as the existing pandemic). A few hours of support from an expert (such as Michael) via TUME Interim, ensures increased confidence in your approach. Please contact us below or link in with Michael here if you would like to start the conversation…